Governments control and hinder international trade with various barriers.
Countries must trade with each other in order to obtain the raw materials, food and products that consumers need. International trade has therefore been an economic fact of life for thousands of years. The desire to find new trading partners and sources has driven explorers and empire builders. Nonetheless, trade has a downside. It can upset a domestic economy and lead to unemployment and the collapse of industries. This is why governments use trade barriers.
The Downside
Imagine that country A has low labor costs. Country A can therefore make and sell products cheaply on the international market. Country B, on the other hand, has high labor costs. It makes the same products as country A but for a higher price. The result is that the companies in country B that make the more expensive products cannot compete with those of country A. The companies in country B go out of business. This leads to unemployment in country B. The only way to stop this from happening is for the government of country B to introduce trade barriers. These prevent country A's products from entering country B at a cheap price or in large quantities.
Tariffs
A trade tariff is a tax. Governments either place a tariff on all goods imported into a country or on specific goods from certain places of origin. A tariff increases the price of imported products. Its purpose is not to prevent cheap goods from entering a country but to raise the cost. This means that consumers don't automatically buy a cheap foreign product rather than a more expensive domestic equivalent. When the prices of both products are about the same, consumers simply choose the one they prefer.
Quotas
A government may use quotas instead of, or as well as, tariffs. Quotas restrict the amount of foreign products that can enter a country in any given year. There may be a quota on foreign cars, for example. This quota may restrict the import of such cars to 100,000 a year. Domestic consumers are free to buy these cars, but once vehicle number 100,000 has sold they must choose a car made in their home country.
Non-Tariff Trade Barriers
Apart from tariffs and quotas, there are subtler forms of trade barrier. These are non-tariff trade barriers. Complex import regulations, for instance, deter foreigners from trading with a country. The need to obtain permits for using airports and harbors delays a foreign company's attempts to distribute and sell its products. Packaging laws within a country drive up costs for foreign imports. One of the most effective and controversial non-tariff barriers, though, is the imposition of product quality standards. A government insists, for example, that certain foreign products such as fresh food meet rigorous, legally-enforced standards of quality before they can enter a country. These standards are so tough that the foreign product has no hope of meeting them.
